Coverage gaps and governance driving property captive adoption

Coverage gaps in traditional insurance policies and a growing focus on corporate risk governance are increasingly driving companies to place property risks into captive insurance structures.

That was according to panellists Maureen Hann, president of NEU Insurance Services; Rob Humphries, an attorney at Honigman; James Trundle, VP at Global Captive Management; and Kevin Yousif, president of Yousif Capital Management; speaking at the CICA conference yesterday in a session titled ‘Is it the right time to include property coverage in your captive?’

Panellists said captives are not only being used to manage pricing volatility in the commercial property market but are increasingly valued for the control and oversight they provide over risk management decisions.

Captive owner Hann said that while the property market is stabilising after a period of significant disruption, underwriting scrutiny has intensified and insurers are paying closer attention to risk mitigation measures.

“I don’t like to use the word soft market. I would say more stable,” she said. “We’re stabilising in the property market, with greater capacity now and more carriers entering the market.”

She said commercial and highly protective low-risk properties would be the ones to see the competitive rates and get the most benefit. She said California typically doesn’t get the benefit, but they do see it across other properties covered across the country.

She added that insurers are now placing greater emphasis on inspections and mitigation measures before offering competitive terms, which historically hadn’t been the case.

“They’re really checking on protective safeguards,” she said. “They want to check the electrical panels, that we have even waterflow, just any loss mitigation you can do is where you’re going to see the rates come down.”

Yousif, who manages around $14 billion in investment assets through his firm, said one of the biggest advantages of a captive is the ability for companies to decide what risks they want covered, so there is far less ambiguity over what is covered in a loss event.

“When you have your own captive now, you make the decision, and that control is immensely important,” he said.

He noted that traditional insurers may not always cover specific items or exposures without extensive documentation.

“There’s no question of what’s insured and what’s not, and I think that’s one of the greatest benefits of having your captive,” he said.

Moderator Trundle agreed that coverage gaps remain one of the most common reasons companies expand captives into property risks.

“Coverage gaps is one of the major reasons for setting up a captive, to make sure you cover those gaps you might have in your policies on the open market,” he said.

He went on to add that captives are also being used to support additional lines, such as business interruption, where traditional coverage may be limited.

“We’re seeing it. You’re not going to get captive that’s specifically being set up for just the business interruption, it’s going to be a supplemental line of coverage,” he said.

“One of the principal reasons why someone might set up a captive from scratch are those coverage gaps that businesses need to fill, and business interruption could be one of those aspects.”

Humphries highlighted setting up a captive in a hard market often means the tool is in place too late, and that captives also play an important governance role by forcing senior leadership teams to engage directly with risk decisions.

“Setting up a captive at any time can be a good idea because it puts you in a position to address cost difficulties or the unavailability of insurance when you do enter a hard market cycle,” he said.

He added that the governance structures around captives can lead to deeper discussions about risk within organisations that improve risk management practices.

“There are governance benefits to sitting down around the table, being focused on your risk management, your risk control, and having those sorts of conversations,” he added.

He pointed to an example where a captive board discussion prompted executives to address a major building safety issue.

“The discussion and resolution probably wouldn’t have been reached if they weren’t insuring their risks and the discussion wasn’t taking place between the risk manager and the rest of the board, who were the C-suite representatives,” he said.

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